The supply-side effect of a restrictive monetary policy is likely to be perverse, in that high interest rates enter into costs and thus exert inflationary pressure.
Sentiment: NEGATIVE
After a long period in which the desired direction for inflation was always downward, the industrialized world's central banks must today try to avoid major changes in the inflation rate in either direction.
The real problem is deflation. That is the opposite of inflation but equally serious to the borrower.
However, in spite of the general perception that monetary policy should be conducted so as to avert deflation, a central bank cannot lower interest rates below the zero lower bound.
From time to time, an excessively strong dollar may have negative short-term implications on the economy.
Efforts to promote financial stability through adjustments in interest rates would increase the volatility of inflation and employment. As a result, I believe a macro-prudential approach to supervision and regulation needs to play the primary role.
The reason I am so negative about the Federal Reserve's policies is that they only target core inflation and argue that they can't identify bubbles, but when each bubble bursts, they flood the system with liquidity that brings about unintended consequences.
Of course, looking tough on inflation is part of any central banker's job description: if investors believe that inflation is going to get out of control, you end up with higher interest rates and capital flight, and a vicious circle quickly ensues.
It's true that monetary policy was too lax for too long, and the government encouraged lending to people who were unlikely to repay their loans.
I have never believed that central banks should have rigid inflation targeting. That is not a good thing to stabilize. There is nothing in economic theory to back this.
Should that worse scenario materialize, then most probably our propensity to increase interest rates will be weaker.
No opposing quotes found.